Decision Making –II

Quiz1

Maximum time allowed 45 minutes

Problem: [27+2+2+7+7 = 45 points]

On a particular Monday, you have been given Rs.12,000 and have been asked to spend the whole

amount to buy shares in the market on Tuesday morning. Your options are to spend the whole amount

to buy shares of Company A, or to spend the whole amount to buy shares of Company B, or to spend

equal amounts to buy shares of both companies. Shares of Company A can be bought on Tuesday

morning at Rs.60 per share, and shares of Company B at Rs.20 per share. You will have to sell all your

shares on Wednesday evening, just before closing time. Your payoff is the profit/loss you make with

your investment.

At closing time on Tuesday, the price of Company A’s shares have a 60% chance of increasing by 20%

over their price at the time you buy the shares, and a 40% chance of decreasing by 40%. At the time

when you sell your stock, the prices of Company A’s shares have a 30% chance of increasing by 20% over

their price at starting time on Wednesday, and a 70% chance of decreasing by 40%.

At closing time on Tuesday, the price of Company B’s shares have a 30% chance of increasing by 50%

over their price at the time you buy the shares, and a 70% chance of remaining unchanged. At the time

when you sell your stock, the prices of Company B’s shares have a 50% chance of decreasing by 10%

over their price at starting time on Wednesday, and a 50% chance of decreasing by 40%.

The prices of both stocks at opening time on Wednesday are the same as their respective prices at

closing time on Tuesday. The share prices of the two companies vary independently of each other.

(a) Fill out the entries in the payoff table for this problem.

(b) What will your decision be if you used the maximax approach for decision making? What is the

maximax payoff?

(c) What will be your decision if you used the maximin approach for decision making? What is the

maximin payoff?

(d) What is the maximum regret associated with each of your three decision options? What will

your decision be if you used the min-max regret criterion?

(e) What is the expected payoff associated with your three decision options? What would your

decision be if you adopted the maximum expected value criterion for your decision making?

Name: ______________________________________________________________ Roll No. ___________________ Section: ______

• We expect your answers to be correct up to at least two places after the decimal point.

• Please write in blue or black ink only.

• We do not consider anything that is not there in the answer-sheet. Specifically, we will not consider your rough work.

• Write legibly. If we cannot read your answer, you do not get any marks for the answers.

• Please do not adopt unfair means. If caught, action will be taken as per specifications in your programme manual.

(a) Payoff table (Note that you need to fill out the values of A and B in each of the columns)

Share Prices

Decision

A:100

B: 100

A:100

B: 100

A:100

B: 100

A:100

B: 100

A:100

B: 100

A:100

B: 100

A:100

B: 100

A:100

B: 100

A:100

B: 100

Buy A 00

Buy B 00

Buy both 00

Probabilities 00

(b) The decision is ________________________________________________________________________________________________

The maximax payoff is Rs.___________________________

(c) The decision is ________________________________________________________________________________________________

The maximin payoff is Rs.___________________________

(d) The maximum regret associated with

Spending the whole amount on shares of company A is _________________________

Spending the whole amount on shares of company B is _________________________

Spending equal amounts on shares of both companies is _________________________

The decision is ________________________________________________________________________________________________

(e) The expected payoff associated with

Spending the whole amount on shares of company A is _________________________

Spending the whole amount on shares of company B is _________________________

Spending equal amounts on shares of both companies is _________________________

The decision is ________________________________________________________________________________________________